US Dollar: Long-term decline, short-term appreciation

Macroeconomic snapshot

The outlook for the economy of the United States can be characterised as slightly optimistic improvement: this means that the data suggests the economy will improve and at a potentially faster rate than the markets are expecting.

May meeting of the Federal Reserve’s, Federal open market committee

• The Federal Funds rate was hiked by 0.25% to 5.00%-5.25%.

• The data analysed indicates that the Fed Funds Rate has risen as anticipated but is not expected to rise much further: this outlook can be characterised as indifferent indifference.

• The next meeting is on Wednesday the 21st of June.

• The CME Group 30-Day Fed Fund futures prices indicate that the odds are in favour of a pause in June and climbing (75% prev. 40%). The July meeting is being priced in as a 0.25% hike (50% and rising).

GDP growth rate report for Q1 2023, second estimate

• GDP in the US for Q1 expanded at an annualised rate of 1.3% which is much slower than the 2.6% in Q4 2022.

• The data analysed indicates that the economy has grown faster than anticipated and is expected to grow a bit faster: This outlook can be characterised as optimistic small improvement.

• The final Q1 report is due on Thursday the 29th of June.

CPI report for April

• Annual CPI in the US for April inflated at a rate of 4.9% which is slightly slower than the 5.0% in March.

• The data analysed indicates that CPI has fallen slightly faster than anticipated and is expected to fall much further: this outlook can be characterised as a slightly optimistic big improvement.

• The May report is due on Wednesday the 21st of June.

Labour report for May

• Unemployment in the US for May is 3.7% which is much higher than the 3.4% in April.

• The data analysed indicates that unemployment has climbed faster than anticipated and may climb further: this outlook can be characterised as pessimistic deterioration.

• The June report is due on Friday the 7th of July.

Russian invasion of Ukraine

• The war is having a detrimental effect on the global and US economy by causing higher energy prices, higher food prices, higher inflation and is impacting economic growth

China-US trade war

• The trade war is having a detrimental effect on the global and US economy by causing higher prices for consumers, increased uncertainty for businesses, disrupted supply chains, job losses and is impacting economic growth

2023 debt ceiling crisis - Resolved

• The debt ceiling crisis was reducing investor confidence in the dollar and therefore had a negative effect on its value.

• The US hit its debt ceiling on the 18th of January 2023 and Secretary Yellen began enacting temporary "extraordinary measures" to pay the bills although this is unlikely to continue beyond the 1st of June. With a split congress (Democrats control the senate and Republicans control the House of Representatives) there was an impasse on getting an agreement to raise the debt limit.

• Crisis resolved on the 3rd of June when President Biden signed the Fiscal Responsibility Act of 2023 into law which suspends the debt limit until 2025.

Previous three months (March to May)

The dollar lost value in the past three months from March to May, however it did start to recover from the lowest level of 101 in mid-April after hitting a low of 101. This regained strength can be attributed to investors pricing in interest rates staying higher for longer. This is because the Fed has not made any dovish statements or considered cutting rates after the banking crisis.

Month to date (June)

The dollar has lost value through the early start of this month having reached a high of 104 last week as traders price in a pause from the Fed’s hiking cycle. However, the NFP report last Friday showed more jobs have been added than was expected and so the case for a hike has become stronger.

Outlook

Long Term Value of the US Dollar to Steadily Decline: As the US and global economy improves, investors are likely to move away from the safe haven of the dollar. Moves are expected to remain below the three month swing high of 106 unless multiple rate hikes begin to be priced in or the banking crisis deteriorates.

Short Term Value of the US Dollar to Slightly Appreciate: With the 2023 US debt ceiling resolved, some investors may be more willing to take risks with their money, which could lead to an increase in demand for dollars. Additionally, the market is expecting the Federal Reserve to raise interest rates in July, and there is a chance that they could raise rates at their June meeting. It is important to monitor market commentary on the Consumer Price Index (CPI) report, which is due out next week. A soft reading on CPI could negate any strength in the dollar. Moves are expected to remain above the 50 day average of 102.

The events to keep an eye on:

• June 13th: US CPI (fall expected to 4.7% from 4.9%).

• June 14th: Fed Policy Meeting (pause expected at 5.00%-5.25% although there is some doubt in favour of a hike).